Question 1

How are compensatory damages calculated for breach of contract?

Accepted Answer

Breach of contract damages typically are calculated as the amounts necessary to compensate the plaintiff for losses stemming from the breach, or to protect the plaintiff’s expectation damages under the contract (i.e., benefit-of-the-bargain damages). 
The general rule is that disgorgement of profits is not a measure of damages available in a breach of contract action, and is available only as an equitable remedy, appropriate for causes of action such as breach of a fiduciary duty.

Question 2

How are liquidated damages calculated for breach of contract?

Accepted Answer

Liquidated damages are a type of remedy for breach of contract, which the parties agree to at the time the contract is executed. However, there are a number of requirements that must be met before liquidated damages clause can be enforced by a court or arbitrator. These requirements are often characterized as a two-prong test. First, the liquidated damages cannot be a penalty. Second, they must have been a “reasonable” forecast of estimated damages at the time of contracting. In other words, the damages from the breach of contract must have been difficult or impossible to estimate at the time the contract was entered into, and the stipulated amount of damages must be “reasonable.” 
The first prong of the test is pretty straightforward, and “reasonableness,” under the second prong, is determined at the time of contracting. Without getting into the nuances, however, there has been much debate about whether, in determining “reasonableness,” Texas follows the “single look” approach (where the court looks at whether the liquidated damages amount was a reasonable forecast of damages at the time the contract was executed); or alternatively, the “double look” approach (where the court looks at whether the liquidated damages were both: (1) reasonably forecasted the time of contracting and (2) reasonable at the time of the lawsuit, by comparing the amount of actual damages to the liquidated damages). 
Texas says that it follows the single look approach, but a decision by the Texas Supreme Court supports the position that courts also can consider actual damages (i.e., the “double look” approach) in determining whether the liquidated damages amount was reasonable at the time the contract was made.  See FPL Energy LLC v TXU Portfolio Management Co., 426 S.W. 3d 39 (Tex.2014).

Question 3

What are indemnification obligations?

Accepted Answer

Contracts often contain “indemnification provisions” comprised of the following elements: 
A typical indemnification provision requires one party (the “Indemnifying Party”) to indemnify the other party (the “Indemnified Party”) against third party claims arising from the Indemnifying Party’s actions. Depending on the language of the contract, an Indemnifying Party’s obligations may also extend to first party claims (i.e., damages flowing from the Indemnifying Party’s breach of the representations or warranties contained in the underlying contract). While similar to a breach of contract claim, indemnification for first party claims affords the Indemnified Party a broader remedy not restricted by traditional limitations of liability (such as foreseeability) and allows for compensation of all losses including attorneys’ fees.
A typical indemnification provision also imposes on the Indemnifying Party a duty to defend the Indemnified Party against indemnified claims. If the Indemnified Party is named as an “additional insured” on the Indemnifying Party’s general liability insurance policy, the insurer will appoint counsel to fulfill this requirement. Some indemnification provisions, however, state that the defense must be provided by counsel “chosen by” or “acceptable to” the Indemnified Party (giving the Indemnified Party the power to reject an insurer’s choice of counsel). Under this provision, the Indemnifying Party may be directly on the hook to pay the Indemnified Party’s chosen counsel.

Business Law FAQs

How are compensatory damages calculated for breach of contract?

How are liquidated damages calculated for breach of contract?

What are indemnification obligations?

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